Introduction

In the 1970's both the Route 128 complex of Boston and the Silicon
Valley were centers of high technology industry, but by the 1980's
the Route 128 area was stagnating while the Silicon Valley, after
experiencing economics shocks, was moving ahead to become the unchallenged
global leader in high technology. The difference in the two areas was not
in resources or location but in their commercial culture. Route 128 firms
tended to be insular and proprietary, whereas the Silicon Valley firms were
open and linked by social and economic networks which enabled them to adjust
to the vissitudes of market shifts. Route 128 was more highly dependent upon
federal government contracts than Silicon Valley and, when government
contracts declined with the moderation and end of the Cold War, Route
128 found it hard to adapt to the civilian market.

The Origin of the High Technology Centers

During World War II the Federal sought the development of high technology
weaponry at top universities such as the Massachusetts Institute of Technology
(MIT), Stanford University and the University of California at Berkeley.
There was a desire on the part of both the Federal Government and these
universities to continue the relationship. In some cases the research
during the war was carried out in research organizations set up organizationally
within the universities but physically separated from the campuses for
security reasons; e.g., Lincoln Laboratory at MIT. After the War these
research laboratories were made more independent of their universities
and began to function as businesses. They were however businesses that
were primarily dependent upon government contracts.

The Boston area had a long tradition of technology and the new research
laboratories had to fit into the business environment of the area.
Santa Clara County was still primarily agricultural at the end of the
war and was not constrained by the institutional arrangements of business
the way the new businesses were in the Boston area.

Some small comments on the history of the two areas are appropriate at
this point. Ms Saxenian mistakenly
asserts that the Silcon Valley area was most famous for "its apricot and walnut
orchards," rather than its orchards of French plums which were used to make
prunes.

The topgraphy of Boston with its river channels and bays
make local travel difficult. In additional to the natural difficulties
of the terrain Boston has a terrible, hap-hazard street pattern rather than anything
approaching a rectangular grid. It is alleged that this street pattern
arose because the early residents of Boston paved the meandering cowpaths
to make roads. Therefore it was a major undertaking to travel from one
side of the metropolitan area to the other. To remedy this situation the
traffic planners decided to build a peripheral roadway, called Route 128,
that would allow
travelers to skirt the dense, difficult traffic conditions of Boston.
Businesses quickly realized the advantages of locating close to Route 128.
New businesses, particularly the the high technology companies, chose
location near Route 128. Branches of major corporations such as Sylvania and
RCA were located on Route 128. But startup companies became the most
significant factor in the economy of the area. Ratheon rose to prominence
in the Route 128 area. By 1970 Route 128 was the major
center of electronics development in the U.S., but most of that development
was financed by Federal Government contracts.

In the 1970's, as the space race and the Vietnam War wound to a close,
military contracts for the Route 128 area dropped
significantly. This decline in contracts produced a severe recession in
the Route 128 area. The unemployment in high technology industry rose
to 20 percent in the early 1970's.

The development of minicomputers saved Route 128. Ken Olsen, who had
been working at Lincoln Laboratory left Lincoln with two other engineers
in 1957 to found Digital Electrons Corporation (DEC). They worked on ways
to reduce the size of computers and the result of their efforts was the
minicomputer, a computer the size of desk instead of the size of a room.
By 1977 DEC had 41 percent of the world's sales of minicomputers.

Some of the other computer firm operating in the Route 128 area were:

Digital Equipment Corporation (DEC) founded by Ken Olsen in 1957

Wang Laboratories, founded by An Wang of Harvard University

Computer Control Corporation, a subsidiary of Ratheon that was
purchased by the Honeywell Corporation of Minneapolis, Minnesota

Data General Corporation (DG), a startup founded in 1968 by Edson DeCastro who
had previouly worked at DEC

Prime Computers, founded in 1972 by William Poduska who had previously
worked for the minicomputer division of Honeywell

Computervision, founded by Philippe Villers to manufacture minicomputers
as components for Computer-Aided-Design (CAD) and Computer-Aided-Manufacturing
(CAM) systems.

Although the first (DEC) and third largest manufacturers of minimcomputers
in the world in the 1970's were located in the Route 128 area, the second
largest, Hewlett-Packard (HP) was located in the Palo Alto area in
California, in the area that later became known as "Silicon Valley."

Competition and Community in the Silicon Valley

Business was conducted according to traditional lines in the Route 128
area. Suits were the only proper attire during business hours for the
professionals. Employees socialized only within the company and social
contacts with people outside of the company were viewed with suspicion as
potential leaks of trade secrets. In contrast, in the Silicon Valley
dress codes were looser and communities of friendships existed across
company lines. People changed jobs frequently in the Silicon Valley
whereas in the Route 128 area professionals seldom changed jobs.

Many of the founders of companies in the Silicon Valley originally
came from the Midwest. Although they may have gone to college and later
worked on the East Coast they did not really accept the East Coast
formality and stuffiness. They found the casualness of California more
to their liking. They also felt freer to experiment with new institutional
arrangements in California.

The eight engineers that left William Shockley's firm to create Fairchild Semiconductor
were the crucial catalyst in the development of the Silicon Valley. Fairchild
Semiconductor became the training center for technological entrepreneurs.
There was a high degree of cooperation and sharing of experience among
the entrepreneurs and professional in the Silicon Valley. Some of this
comraderie may have been a continuation of relationships that had originated
as students in the top technical universities such as Stanford.

The sense of community that existed among the technical people of
the Silicon Valley was not just a pleasant social phenomenon. It enable
Silicon Valley firms to solve technical problems more easily and rapidly
than technical people who were limited to contacts with other employees
of their company. This flexibility and adaptibility in the long run
gave Silicon Valley an adaptibility and flexibility that was more important
to the survival of the industry than any possible loss of trade secrets.
Saxenian quotes Wilf Corrigan, the founder of LSI Logic, who expresses it in terms of people thinking
of themselves as working for Silicon Valley rather than a particular
company.

The frequent changes of jobs in the Silicon Valley necessitated and
re-enforced the community of relationships that existed. In contrast,
the formality of business relationships in the Route 128 resulted in
technical people being reluctant to change jobs.

The success of technical people who left career jobs to become
entrepreneurs made it easier for others to take the risk of starting
their own companies. There was also more of a willingness to invest
in startup companies. Often those providing the venture capital were
the successful entrepreneurs of the past. The office complexes on
Sand Hill Road near the Stanford campus became a major center of venture
capital.

The end result of the ease with which companies could be formed
resulted in a large number of small companies. By 1980 there were
about three thousand electronics firms in the Silicon Valley, 85
percent of which had less than 100 employees and 70 percent had
less than 10 employees. The community that existed among the employees
and entrepreneurs of Silicon Valley was extended to a community of
interest among the companies. Cross-licensing arrangements were
common.

The fact that there was a diverse technical workforce and an abundant
supply of technical services and parts also contributed to the ease
with which entrepreneurs could startup companies.
This is the power
of the agglomeration of Silicon Valley.

Saxenian notes that, in addition to Stanford and the University of
California at Berkeley, San Jose State University has been a major
supplier of trained technical personnel for the Silicon Valley.

It is interesting that a high technology complex developed around
Stanford but not around UC-Berkeley. It may be a result of the
anti-business political climate of Berkeley.

The Hewlett-Packard (HP) Business Model

HP pioneered a business structure based upon project teams involving
open-ness and participation rather than hierarchy. A high degree of
internal communication was important. HP encouraged
managers to "wander around" and get acquainted with employees and
their progress on their projects.

Intel, which was founded by Robert Noyce and others from Fairchild
Semiconductor, had a organizational arrangement similar to HP. HP
emphasized the notion of a corporate family whereas Intel, while
promoting decentralization, still encouraged competitive striving
for excellence.

In HP and Intel professional employees were given stock options to
contribute to their sense of the unity of the sucess of their company
and themselves.

The Route 128 System

Massachusetts was the site of centuries of business enterprise and innovation.
Family and corporate histories were long and important. The business ideal
was the self-sufficient company, insular and hierarchical. This model of
business was regarded as tested and true, the proper form of operation.
Yet despite an early lead in transistor technology and production Route
128 lost decisively to the Silicon Valley.

Ken Olsen, the founder of DEC, attributes the closedness of business
firms in New England to puritanism. Stability and frugality were highly
valued. Risk-taking was looked down upon and failure was an ineradicable
blemish on a person reputation. In contrast, in the Silicon Valley risk-taking
was admired and failure was a temporary setback but not a calamity. And
when the Silicon Valley entrepreneurs made a fortune they spent on luxuries,
sometime ostentatious luxuries. Consequently a fortune was more valuable
to the entrepreneurs in the Silicon Valley; it meant a definite improvement
in lifestyle. In the Route 128 area getting rich did not mean a change
in one's standard of living. It is no wonder there was less risk-taking
along Route 128. Also the spending of the fortune-makers in the Silicon
Valley contributed to the prosperity of the local economy.

Ms Saxenian quotes the founder of Convergent Technology about his
experience in the Silicon Valley after having worked for eleven years
at DEC:

There is no way I could have started Convergent in the
Boston area....When I started Convergent, I got commitments for $2.5
million in 20 minutes from three people over lunch who saw me write
the business plan on the back of a napkin....In Boston, you can't do
that. It's much more formal. People in New England would rather
invest in a tennis court than high technology.

The Relation of the Two Areas to Their Universities

MIT, secure in its reputation as the top engineering university in the
world, gave very little help to the Route 128 bunsinesses. The businesses
had to pay $50,000 to have access to MIT's research findings and educational
facilities. Gordon Bell of DEC said, "Every time I went to MIT I got sick
because they wanted our money but we could never get joint projects going."
In contrast Stanford charged only $10,000 for access to research findings
and a special recruiting relationship. Employees of companies which paid
the fee were able attend research meetings. Gordon Bell of DEC said his
company had closer relationships with Stanford and UC-Berkeley, despite
their distance, than with MIT. In California there was an extensive
community college system and a state university system that supported
high tech industry, whereas in Massachusetts there was not.

Business Organizations in the Two Areas
and Their Relation to Local Government

In the Route 128 area the business organizations focused their efforts
on getting reductions of state and local taxes and emphasized that their
continued presence in the area was dependent upon the level of taxes.
The success of such efforts tended to starve local governments of resources
for infrastructure projects that might have enhanced the desirability of
the location. In contrast, in Silicon Valley firms like HP worked with
local government to solve community problems.

Digital Electronics Corporation (DEC)

Although DEC was the leader in minicomputer production it was not a typical
Route 128 firm. DEC located in Maynard, Massachusetts, a small town of
10,000 without convenient access to Route 128. DEC executives used a
helicopter for quick access to the outside world. DEC was an island to
itself without a relationship even with the town of Maynard.

DEC's operational procedures were a modification of the traditional
New England business. The founder, Ken Olsen, down played hierarchy
and formality. Work was carried out in project teams. In this way DEC
was more like the Silicon Valley firms. DEC emphasized very strongly
loyalty. In return, DEC had an unofficial policy of no layoffs. But,
as Ms Saxenian points out, such a policy has the effect of making success
within the company depend more on relationships with managerial staff than
solving technical problems or dealing with the outside world. Ultimately
the key decisions were made by Ken Olsen and the top elite.

When Edson DeCastro left DEC to found Data General (DG) there was a bitterness
between the companies that has lasted for decades. DEC threatened to sue
DG over the theft of proprietary technology. DG has sued other companies
over such issues. The net result is that each firm in the Route 128 area
aspires to vertical integration and insularity. They value security
more strongly than opportunity.

The Decline of Route 128 and the Rise of the Silicon Valley

The Route 128 firms had an early dominance of the electronics industry
in the 1950's, both in vacuum tube and transistor technology. In 1959
the employment in electronics in the Route 128 area was almost triple
the employment in electronics in the Silicon Valley. But thereafter
employment in electronics in the Silicon Valley was rising exponentially
whereas employment in the Route 128 area, although fluctuating, was
on a steady decline. By 1980 employment in electronics in the Silicon
Valley was more than three times that of the Route 128 area.

The technology in electronics began to change so rapidly that there was
not much advantage to being an established business in the industry. Being
an old firm often meant being committed to an obsolete technology. For
example, the Philco Corporation created an automated line for manufacturing
transistors in 1958 but by 1963 its technology was obsolete and the
investment was not recoverable. Philco left the industry.

The Route 128 firms sought to produce their semiconductor devices within
the company so the area lost the economies of scale advantages that
accrued to the Silicon Valley economy of having such devices produced by
specialized firms.

Silicon Valley's Deviance from Its Winning System

Initially the firms in the semiconductor industry in the Silicon Valley
produced customed-designed integrated circuits under contract with customers.
The disadvantage of this arrangement is that the production runs were
relatively small. The advantage was that the firms were not subjected to
relentless competition which drives down the price and eliminates profits
necessary for research and development.

But there was one product which
did become standardized and Silicon Valley firms thought could be produced
as a commodity. That product was computer memory chips. Intel introduced
1 K Dynamic Random Access Memory (DRAM) chips in 1970. Many other firms
soon entered the market and price competition became fierce. In 1974 the
size of the chips was increased to 4K and to 16 K in 1975. The innovations
in size were made by Intel but other firms quickly matched these. By 1979
there were 16 firms in the 16K DRAM market; five of them were Japanese. The
size and price competition continued to escalate. By 1984 Japanese firms
introduced the 256K DRAM chips and when U.S. producers tried to match the
Japanese prices they suffered substantial losses and by 1986 had dropped
out of the market. There was a loss of 25 thousand jobs in the Silicon
Valley.

It is easy to get paranoid about unfair competition from Japan. There is
first of the problem of Japan, Inc., the network of government and private
industry that turns economic competition into a political equivalent of
war and tries to find ways to negate the rules of the market place. Political
manipulation of interest rates and the exchange rate to produce an undervalued currency can give
an insurmountable advantage to a country's producers. Lifetime employment
makes labor costs a fixed cost and results in a firm being willing to
continue sales at price levels that would cause other firms to drop out
of production. Control of access to domestic markets can enable a firm
to sell at a lower cost to foreign buyers than to domestic buyers. All of
these could have been involved in the lower prices for Japanese memory
chips. But the key to the Japanese success in the memory chip competion
was simpler and more innocent.

Integrated circuit devices are produced by creating many copies of their
circuitry on a silicon wafer. Production costs depend upon the number of
wafers processed. Some of the chips in a wafer may be defected so the
output of the process depends upon the proportion of the chips on a wafer
that are good, the yield rate. Cost per unit are thus inversely proportional
to the yield rate. Japanese producers gave greater attention to quality
control and achieved substantially higher yield rates than the American
producers and consequently the cost per unit device produced was about
half that of the American producers.

But initially the American producers did not understand the nature of the
problem. At the height of the price competion the Silicon Valley abandoned
their tradition of collaboration with suppliers and customers and tried
to push the cost cutting off onto the suppliers. The antagonisms that
developed interfered with the solution of design problems and thus made
things worse rather than better. The American producers tried to rely
upon high volume and the economies of scale and this approach did not work.
Silicon Valley firm's strength was in their creativity and agility in finding
new products and improving them ahead of the competition rather than in
the brute force economics of the production of commodity items.

Silicon Valley firms left the field of DRAM chips but Intel had created
a new product that became the basis for an entirely new industy. That product
was the microprocessor. This was a complex integrated circuit that could
be programmed. Thus a customer who wanted a specialized device did not
have to have an integrated circuit custom designed and produced in a small
batch. Instead the microprocessor could be programmed to produce the same
result and the microprocessors were produced in quantities in which some
economies of scale could be achieved. However Intel did not stop with one
microprocessor. They constantly redesigned and improved their microprocessor.
The first was the 8080 followed by the 8086, then the 80286 and 80386.

The microprocessor was not invented with the personal computer industry
in mind but quickly some realized that the micropressor was, in effect,
a computer on a chip. The history of the personal computer is told elsewhere.

DEC's achievements in the minicomputer field were outstanding, but they
have been forgotten in the wake of the even more spectacular developments
in personal computers. In 1965 DEC introduced the PDP-8 (Programmed Data
Processor) that sold for only $18,000 when the price tag for computers
had recently been in the hundred thousand dollar price range. The PDP-8
was four times faster than its rivals. But in 1969 Data General offered
its NOVA with double the speed and memory capacity of the PDP-8. DEC came
back in 1977 with its VAX-11/780 super-minicomouter that had the power of
a mainframe computer at a fraction of its cost. Both DEC and DG strived and
to a large degree achieved vertical integration, but this made them
vulnerable to technical breakthrough elsewhere in the same way that their
development of minicomputers weakened IBM.

The VAX line of DEC and the NOVA of DG both had proprietary operating
systems which limited access to programs developed by the general programming
community. At the time the development of proprietary systems seemed the
natural approach. It was only later with the proliferation of the personal
computer that people began to understand the power and importance of open
systems; i.e., the development of standards such as operating systems that
enabled users to share their work. Even when customers began to show a
preference for open systems the Route 128 companies stuck with their
proprietary system approach.

The expansion of the minicomputer industry in the 1970's created a boom
in the economy of Massachusetts. The boom had ended by the mid-1980's and
in the late 1980's 50 thousand jobs were lost by the Route 128 firms.
The major competition for the Route 128 firms was the Silicon Valley, but
the real enemy of the Route 128 area firms was their organizational structure
that was inappropriate for the dynamic field of computer technology.

Silicon Valley firms, relying upon components and services available
in the market, were able to develop new models and even new product lines
far, far faster than the Route 128 firms which insisted upon developing
everything in-house and effectively had to re-invent the wheel.

The Route 128 firms not only failed to communicate effectively with the
market they often failed to communicate internally. Saxenian cites the
case of DEC cutting its scheduled production run on a personal computer
from 250,000 to 100,000 but the divisions producing components for this
computer continuing to produce 250,000.

In 1985 DEC set up a research laboratory in Palo Alto but largely ignored
the information and insights this operation gained by being in the Silicon
Valley.

William Poduska created the Route 128 firm of Prime Computers. After
Prime was well launched Poduska left Prime to start Apollo Computer. Apollo
introduced the workstation computer to the world in 1980. Sun Microsystems of the
Silicon Valley entered the workstation field in 1982. Despite this two-year
lag Sun Microsystem, the archtype of the aggressive and agile Silicon
Valley startup, won the workstation market away from Apollo.

The early 1980's began the era of the personal computers based upon the
microprocessor pioneered by Intel. Route 128 firms remained committed to
the minicomputer architecture with custom-made integrated circuits for
central processing units. They could not except the grim reality that
technological innovations can make past technology, no matter how
wonderful it once was, obsolete and as dead as yesterday's newspaper.

In contrast the Silicon Valley, although running away with the new
technology of the microprocessor, did not seem to be wedded to any
particular technology or product. As times changed Silicon Valley firms
seemed to be able to adapt, experiment and recombine endlessly. It was
a much healthier institutionally than Route 128. Saxenian cites a very
eloquent statement by Tom Hayes, an executive of Applied Materials and
a founder of Joint Venture. Hayes said:

Our aim is to build a comparative advantage for the Silicon
Valley by building a collaborative advantage...to transform Silicon
Valley from a valley of entrepreneurs into an entrepreneurial valley.

Restricted Opportunity on Route 128

Saxenian states the problem very succinctly:

Although...Route 128's independent-firm-based system
had provided economic scale and organizational stability that were
valuable in an earlier era, by the 1980's they served primarily
to discourage adaptation. The committment of local companies to
vertical integration meant that technical capabilities and know-how
...remained locked up within large firms. The paucity of horizontal
communications stifled opportunities for experimentation and learning
while traditional corporate structures limited the development of
managerial initiative and skill....This may have imposed a minor
inconvenience to large firms, it bacame a significant disadvantage
for start-ups and small firms that were unable to learn about or
acquire state-of-the art components or services as rapidly as their
West Coast counterparts.

It did not take the talented people long to realize the land of
opportunity for them was not along Route 128 but instead in Silicon
Valley.

Although Silicon Valley lost the price war on memory chips to the
Japanese producers there were still important markets left. There
reappeared a market for custom-designed chips, or as they were now
called Application-Specific Integrated Circuits (ASIC's). The aggregate
market for these amounted to something comparable to the memory chip
market in revenue. Instead of seeking profits in terms of economies
of scale the custom chip makers gained profits from the differentiation
of their products. The new chip startups produced one to two hundred
different types on "mini-fab" production lines with runs of ten to
ten thousand chips in constrast to commodity product "mega-fab" runs of
millions of the same chip.

In the 1980's there was a new generation of startups in the computer
industry of the Silicon Valley. Some of these were:

Company

Specialty

Sun Microsystems

workstations

Silicon Graphics

3D graphic workstations

MIPS ComputerSystems

RISC architecture computers

MasPar

massively parallelcomputers

Tandem

fail-safe computerarchitecture

Pyramid Technology

There were also major startups in the Silicon Valley in the 1980's in fields
such as computer peripherals and software.

Proprietary Versus Open Systems

Prior to the 1980's most computer firms, as a matter of course, created
proprietary operating systems and software for their computers. This
resulted in their customers not being able to use software from other
systems. In contrast, the computer manufacturers which used standardized
operating sytems such as UNIX and DOS enabled their customers to tap into a vast supply of
software created by third parties. This was a tremendous benefit then and
now is considered essential. The use of standardized operating systems is
called the open system approach. Sun Microsystems was a major proponent
of open systems. They made a virtue out of a necessity. During its startup
phase Sun Microsystems did not have the resources and credibility to
develop proprietary systems and was not sure that anyone would accept
such software written by people who seemed to graduate students.

The Bottom Line

Saxenian presents a very telling comparative statistic for Route 128 versus
Silicon Valley. In 1990 HP and DEC, respectively the outstanding
companies of the Silicon Valley and Route 128, both had revenues of
$13 billion. But from its $13 billion HP had net earnings of $771 million
while DEC on its $13 billion had a $95 million loss. In 1992 DEC
had $2.8 billion quarterly loss and founder Ken Olsen had to resign.

The Virtual Corporation

Michael Dell uses the term "virtual corporation" to denote the phenomenon
that Saxenian describes as a blurring of the boundaries of the firm.
This is what occurs when a company works closely with its customers to
satisfy the customers needs. On the other end a corporation can also
mesh its needs with those of its suppliers. The company has a notion
of what it wants and the supplier knows what it can supply. Sometimes
the supplier knows of alternate products which will achieve largely
the same results at a low costs. The firm knows the tradeoffs that
are important. By working together the firm and its supplier may be
able to achieve optimum results which are not even considered in an
arms-length relationship between firm and suppliers.

Silicon Valley firms frequently limit their purchases from any one
supplier to keep themselves from becoming excessively dependent upon
one source of a crucial input. Likewise firms also try to avoid becoming
excessive dependent upon any one customer.

Saxenian gives an interesting example of firm-supplier symbiosis in the
case of electronics assembly. Some firms such as Flextronics began to do contract assembly
work, what was called "board stuffing." In the 1970's these board stuffing
specialists were small and low tech. The client provided the components
and the directions. By the 1980's firms like Flextronics had developed
special equipment and could provide expert guidance in the selection of
components. When a state of confident trust developed between the
electronics firm and the board stuffers the firm could turnover much of
the selection and procurement of components to board stuffing specialist.
The board stuffing firm might also assume responsibility for testing of
the finished devices.

This type of operation involving component selection, procurement and
testing is called "turnkey." Flextronics ultimately played a role in
design of printed circuit boards the company "stuffed." Some technological
advances were also made in assembly. The traditional assembly operation
was the soldering of wires that passed through holes in the circuit
boards. A new method was developed, called "surface mount technology,"
(SMT) which involved the fastening of wires to the boards with epoxy
cement. This method allowed for mounting components on both sides of
a board. This method was pioneered by the Silicon Valley firm of
Solectron. This technology involved a large capital investment and would
not likely have been developed in vertically integrated firms.

Another example of firm-supplier synergy is the relationship between
HP and Weitek. Weitek designed ultra-high-speed chips for faster
numerical computation. HP purchased Weitek chips for its computers.
But Weitek achievements were being limited by the state of its chip
fabricating operation, its foundry. HP discerned that Weitek using
HP higher quality foundry could produce better chips for HP. HP opened
its foundry to Weitek to use to produce chips not only for HP but also
for other Weitek customers. This was a highly beneficial arrangement
for both Weitek and HP.